How Irish banks stack up when it comes to walking line
Published 24/03/2011 | 05:00
AIB HAS been seen as the new problem child in Irish banking since November's stress tests said the bank would have to raise €9.77bn to deal with future losses.
The Government put in €3.7bn of this money in late December, pushing the State's stake in the bank to more than 90pc. Billions more was to have been pumped in by the end of February but that injection was delayed pending the outcome of the new stress tests.
After transferring development loans to NAMA, AIB will be left with a €54bn Irish book including €27.2bn of residential mortgages, €12.2bn of property and construction loans and €12.7bn of commercial loans.
Mortgages are seen as one of the major flashpoints of the stress tests. Last year's stress tests modelled losses of 5pc, implying AIB is already able to take a hit of €1.4bn. Even if that loss rate doubled, you would only be talking about an extra €1.4bn.
AIB has also taken numerous 'self-help' steps on the capital side, raising €1.4bn from a recent debt buyback. On the liquidity side, AIB has €146 loaned out for every €100 it has on deposit, according to a recent report from Glas. This gives AIB a 'loan to deposit' ratio of 146pc -- the Central Bank wants that to go down to about 122pc.
To get there, AIB would have to offload more than €70bn worth of loans or assets. AIB can do that by trying to sell on books of Irish loans or by reviving efforts to sell its UK business, which had a non-NAMA loan book of €20bn in June 2010.
Irish loans are expected to be dealt hefty discounts by the market, while efforts to sell into the UK would be complicated by the fact that there are a lot of other assets for sale there. AIB's preferred route is to carve out the surplus assets and put them in an internal 'non core' bank that would be separate from the 'main' bank.
Bank of Ireland
BoI IS fighting to remain the only major indigenous bank outside of State control. In November, the bank was told it had to raise €2.2bn in capital by the end of February. It has since raised about €750m by buying back its own debt.
Once NAMA transfers are completed, analysts expect the bank to have about €125bn of loans. Those include, Irish home loans of €28bn, Irish business loans of €15bn and Irish property and construction loans of €2.7bn -- which may all face fresh losses under PCAR.
The bank is expected to have to shed €25 to €30bn of assets under the liquidity assessment programme. Some suggest this could be done by selling the UK loan books, which includes €34bn of residential mortgages, and €14bn of property/construction loans. This is seen as problematic, however, since the bank would take hefty capital losses if it was to sell the UK venture quickly.
BoI could also speed up the sale of assets like its insurance business, which it has already agreed to sell by 2014. BoI's preferred scenario is to "warehouse" the surplus assets somewhere until they can be sold for a better price. The bank is agnostic on whether this is done through an "internal" vehicle or through a solution for the entire banking sector.
The bank is hoping that it will be given time to reach whatever capital target is handed down next week, so it can take a shot at getting private investment that would minimise the injection from the Government, which already owns 36pc of BoI.
Irish Life & Permanent
THE smallest of the banks, Permanent TSB, has most at stake in the stress tests. So far, IL&P has been able to avoid taking any state cash, since its life insurance arm has been able to stump up the cash needed for the far smaller bank.
Permanent TSB had an Irish loan book of €29.6bn at the end of 2010, with €26.3bn of this linked to residential mortgages. The high percentage of mortgages means that Permanent TSB would be most vulnerable if the stress tests took a harsh view on mortgage defaults.
The bigger IL&P group has enough headroom to stump up another couple of hundred million for the bank, but real problems would emerge if the bank was forced to sell off assets. Even after taking over €3.6bn in deposits from Irish Nationwide, the bank still has the worst loan to deposit ratio in the industry, with about €200 loaned out for every €100 on deposit.
To correct that, the bank would have to shed more than €10bn in assets. Even a conservative 20pc loss on that sale would leave Permanent TSB with a €2bn capital hole that would be too big for its parent to fill.